Valuation Discounts: What’s the big deal?
Now that the proposal to eliminate valuation discounts for gift and estate tax valuations were removed from the Build Back Better Act, at least for now, you may be wondering what all the fuss was about.
Transferring valuable assets to the next generation while minimizing tax ramifications is one of the goals of most estate planning. For farmers the most valuable asset included in the estate planning process is typically farmland. How can this valuable asset be kept in the family without the fear of heirs having to sell some of the land to pay estate tax in the future? This is where valuation discounts can help.
Whether the farmland is owned outright or is in a partnership or LLC, if a non-controlling interest (50% or less) is being transferred or included in an estate, valuations discounts may be applicable. Under current laws and IRS regulations, the value of the entity is eligible for a discount for a lack of control (DLOC), and a discount for lack of marketability (DLOM). Depending on a number of factors, the effective combined discounts can be as high as 25% to 35%. In the illustration below, the combined discount is 32%:
|
Value of 100% of entity owning farmland |
|
$ 30,000,000 |
|
Less: Discount for lack of control |
15% |
4,500,000 |
|
Value of entity owning farmland after DLOC |
|
25,500,000 |
|
Less: Discount for lack of marketability |
20% |
5,100,000 |
|
Value of entity owning farmland after DLOC and DLOM |
|
20,400,000 |
|
Value without discounts |
|
30,000,000 |
|
Value saved from discounts |
|
$ 9,600,000 |
|
Effective combined discounts |
|
32% |
As you can see, being able to use these discounts to transfer ownership is a big deal and can result in significant estate tax savings. While there have been multiple efforts to eliminate these discounts by Congress over the years, for now they are safe.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
There is no “illustration” included in the article even though it is referenced in the second to last paragraph of the Valuation Discounts: What’s the big deal? article